U.S. stock markets are now factoring in more than a 50% chance that the Federal Reserve will increase the Fed funds rate in June or July.

Rate hikes are positive for most financial stocks because the companies then earn increased fees on customers’ deposits. In addition, withering expectations of a global recession are fueling growth prospects for financial institutions, bringing increased investor attention to the sector.

A growing number of undervalued stocks available for the conservative, steady investor to snap up and hold for long-term gain. It’s an exciting time to be a value investor! And we have a FREE Special Report, How to Find Undervalued Stocks, to help you get started.

Consequently, bank stocks are turning bullish, with stock price charts surprisingly in synch with each other.

With that backdrop, I took a look at banks to see which have undervalued stocks that could make for excellent investments. I certainly did not expect to discover that almost every single bank stock that I reviewed was expected to see earnings fall this year!

In addition, there are a few more prominent banking companies slated for slow earnings growth (<10%) in 2016: Bank of New York Mellon (BK), Northern Trust (NTRS) and U.S. Bancorp (USB).

But I did find one bank that’s an undervalued stock with strong earnings growth.

The Clear Choice Among Bank Stocks in 2016

My investment strategy involves a set of strict investment criteria, with strong, current-year earnings per share (EPS) growth being my first requirement. Therefore, none of the stocks I’ve mentioned has a chance to land on my buy list until we approach fiscal 2017.

I’m not saying that these bank stocks won’t rise in 2016. What I’m saying is that, when stocks rise, the ones with stronger earnings growth stand a better chance of rising farther, over a longer time frame.

My job is to find the cream of the crop value stocks in each industry, which increases investors’ chances of achieving capital gains—because if I can find the best undervalued stocks, you can be sure that institutional investors will buy those stocks in large quantities, driving the prices up.

And my research shows the undervalued bank stock best positioned for earnings growth is Goldman Sachs Group (GS).

Goldman Sachs is a global investment banker, serving consumer, institutional and government clients. The company is expected to fare well in the second half of 2016, as oil prices and stock markets rise, and M&A and underwriting business improves. In addition, Goldman is expected to gain market share in Europe vs. weakening competitors in the EU.

Increased revenue expectations are contributing to rising operating margins, which are expected to grow from 31.3% in 2015 to 35% in 2017.

P/E is Low and Earnings Outlook is Strong

Goldman’s EPS fell in 2015 due to the cost of a settlement imposed on a wide variety of investment bankers over residential mortgage-backed securities litigation. An earnings rebound is expected immediately. Wall Street’s consensus EPS estimates reflect 19.8% and 21.5% growth in 2016 and 2017 (December year-end).

The corresponding price/earnings ratios (P/Es) are quite low in comparison, at 11.1 and 9.1. In recent years of normal earnings growth, the P/E on GS ranged from 8 to 12. Now that the company is producing outsized earnings growth, there’s room for P/E expansion.

I think that any investor who wants to own a bank stock has the decision made for them: Goldman Sachs so dramatically outranks its competitors today on earnings growth and valuation, that it’s the clear choice among bank stocks in 2016.

Goldman’s share price peaked in October 2007 at 235, prior to the infamous 2008 financial meltdown, but continues to recover. GS rose as high as 215 last summer, pulled back with the more recent rough patch in the stock market, and has been slowly rising since mid-February.

The share price appears to have just completed a short-term correction. Investors who buy now will be getting quite a bargain. Barring unexpected negative news, I expect the share price to rise to 166, rest briefly, then to promptly rise to additional upside price resistance around 175.

GS is an undervalued stock with a 1.6% dividend yield.

To capitalize on the trend of rising interest rates, you should own at least one bank stock in your portfolio this year. My recommendation is to buy the only big-name bank stock with strong earnings growth in 2016: Goldman Sachs.

Crista Huff is the lead analyst of Cabot Undervalued Stocks Advisor. Her goal is to assist you in outperforming the major U.S. stock market indexes while minimizing risk, by screening many hundreds of stocks for growth, value and bullish technical charts.

Post navigation

A growing number of undervalued stocks available for the conservative, steady investor to snap up and hold for long-term gain. It’s an exciting time to be a value investor! And we have a FREE Special Report, How to Find Undervalued Stocks, to help you get started.

Cabot Wealth Advisories

As marijuana becomes increasingly legal in both the U.S. and Canada, it makes sense for growth-oriented investors to pay attention to marijuana stocks. The opportunities are much bigger than most investors realize!!

We designed Cabot Prime for dedicated investors like you—investors who want to own the best stocks, collect the biggest profits, and lock in a rising source of income for life. With Prime membership, you get full access to nine of our top advisories and many members-only benefits.

Cabot Prime Pro membership was created for elite investors who are looking for an extra edge in substantially growing the value of their investments. As a Prime Pro member you receive the proven, practical – and profitable – insights and recommendations from all of the expert analysts at Cabot.

This flagship investment advisory has been published since 1970 and it is recommended for all investors seeking to grow their wealth. You’ll receive invaluable investing lessons, so that you won’t just become a more successful investor—you’ll become a wiser investor!

Cabot Dividend Investor focuses on preparing for retirement, recommending a solid range of income-generating stocks, preferred stocks, REITs, MLPs, closed end funds and utilities, with particular emphasis on risk, dividend safety and dividend growth. If you’re retired or thinking about retirement, this advisory is designed for you. Cabot Dividend Investor’s proprietary Individual Retirement Income System (IRIS) will help you allocate your assets for capital appreciation, current income, growth and future income investments according to your retirement goals.

Cabot Emerging Markets Investor focuses on emerging-market economies, with special attention paid to the fastest growing markets in the investment landscape. You'll discover the value of international diversification and the profit potential of investing in countries whose economies are growing far faster than that of the U.S. All these stocks are traded on U.S. exchanges, usually as American Depositary Receipts. Cabot Emerging Markets Investor was recognized as the top investment newsletter in 2006 and 2007 by Hulbert Financial Digest, and was rated by Hulbert as one of the top investment newsletters in every five-year period 2004 to 2011.

Cabot Options Trader’s Chief Analyst and options expert Jacob Mintz uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can benefit from following Jacob’s advice. Whenever Jacob determines the time is right, he sends specific option buy and sell alerts via email and text-message for immediate action. He also sends out a weekly update with his views on the options market, open option positions and his outlook for the coming week.

Cabot Options Trader Pro’s Chief Analyst and options expert Jacob Mintz uses the full spectrum of option strategies to recommend the option that best suits the trade opportunity—calls, puts, spreads, straddles, iron condors and more—while always controlling risk. Whenever Jacob determines the time is right, he sends specific option buy and sell alerts via email and text-message for immediate action. He also sends out a weekly update with his views on the options market, open option positions and his outlook for the coming week.

Cabot Small-Cap Confidential is a limited-circulation advisory for investors seeking profit opportunities in high-potential small company stocks. Each month, small-cap expert and Chief Analyst Tyler Laundon features in-depth research on one outstanding small-company stock that is a pioneer in its field and undiscovered by institutional analysts. Updates on all recommended stocks are sent weekly. The circulation of Cabot Small-Cap Confidential is strictly limited because the stocks recommended are often low-priced and thinly traded. In the publication’s first five years, spanning 2007-2012, the average stock recommendation gained 30.5%.

Cabot Stock of the Week offers the very best of all Cabot stocks across the investing spectrum. Each stock is personally selected by Cabot’s President and most Senior Analyst Timothy Lutts, and guided by the collective wisdom of all the Cabot expert analysts. As a subscriber of Cabot Stock of the Week, you’ll build your wealth and reduce your risk with the single best stock each week for current market conditions among growth, momentum, emerging markets, value, dividend and small-cap stocks.

Designed for experienced investors, Cabot Top Ten Trader is your ticket to fast profits in stocks that are under accumulation now. Every Monday you’ll receive a one-page profile of each recommended stock, including fundamental analysis, technical analysis and buy ranges. Plus... each Friday, Chief Analyst Michael Cintolo will give you an update titled "Movers & Shakers," so you’ll always know his latest thoughts on these fast-moving stocks. Cabot Top Ten Trader is your best source of advice on investing in the market’s hottest stocks.

Yes, you can have Growth AND Value! Combining both growth and value in her growth-at-a-reasonable price strategy, Chief Analyst Crista Huff uncovers stocks with strong growth catalysts that are selling at attractive valuations—the stocks that are temporarily overlooked by mainstream analysts and institutions. Crista applies her stringent screens to deliver the best stocks in three portfolios: Growth, Growth & Income, and Buy Low Opportunities. A subscription includes monthly issues with weekly updates, special bulletins with market and stock alerts and email access to Crista.

Wall Street’s Best Dividend Stocks presents the best income investments from the top Wall Street analysts, researchers and advisors. Editor Nancy Zambell scours more than 200 advisories and research reports to select the top recommendations. Dividend recommendations include high yield, growth and income, REITs, mutual funds, ETFs and more. One Spotlight Stock is featured each month, along with Nancy’s insight on the market and updates on past recommendations. One top recommendation arrives in your email box each morning, and then gets collected into an easy-to-read digest of 30 to 35 top recommendations each month.

Editor Nancy Zambell scours more than 200 advisories and research reports to select the top recommendations by the top analysts. Selections run the full range of opportunities: growth stocks, value stocks, technology, small-caps, biotech, pharmaceuticals, mutual funds, ETFs and more. One Spotlight Stock is featured each month, along with Nancy’s insight on the market and updates on past recommendations. Thirty-plus recommendations are delivered to you in Daily Alerts directly to your email box, and collected in an easy to read digest each month.

Reviews

"I really appreciate your constant and frequent communications about the different stocks you recommend and encourage you to keep up that great work.”

-D. R., San Juan, Puerto Rico

Market Update

From Cabot Top Ten Trader

The odds continue to favor this being a bull market, and the resilience (so far) of many leading stocks and quickly worsening sentiment tell us the next leg up should be a good one. But right now, the sellers are still in control, and there’s nothing that says that can’t continue for a while longer, so it’s best to play some defense and patiently wait for the bulls to retake control.